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Treasury fights to restore American Rescue Plan tax cut rule

An 11th Circuit panel will decide whether an Alabama federal judge wrongly blocked the federal government from telling states they could not use pandemic relief funds to offset tax cuts.

ATLANTA (CN) — The U.S. Treasury asked the 11th Circuit on Tuesday to overturn a decision handed down by an Alabama federal judge last year which blocked the federal government from enforcing a restriction in the American Rescue Plan Act that prohibited states from using the pandemic relief funds to offset new tax cuts.

An attorney for the Treasury Department called the lawsuit filed by 13 states “a very strange constitutional challenge” which asks the Atlanta-based appeals court to “adopt an onerous interpretation” of the tax cut rule.

Justice Department attorney Daniel Winik urged the panel to reverse the lower court’s decision, arguing that the provision of the law does not prevent states from offsetting tax cuts by other means.

“The statute simply doesn’t mean what the plaintiffs fear it does,” Winik said.

Designed to hasten the nation’s recovery from the economic impact of the Covid-19 pandemic, the American Rescue Plan distributed $195.3 billion in flexible relief funds directly to the states. The money represents an average of roughly 25% of the plaintiff states’ annual budgets.

But the money comes with strings attached. Before a state can receive the funds, it must certify to the Treasury secretary that it will comply with certain conditions.

Among those conditions is a rule barring states from using the funds to offset a decrease in their net tax revenue through the end of 2024.

The mandate prompted six federal lawsuits, including the one before the 11th Circuit filed by Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, Utah and West Virginia.

The states claimed that the tax cut rule could be read to prohibit states from passing tax relief of any kind since it is unclear how reductions in net tax revenue will be measured to determine compliance.

An Alabama federal judge permanently blocked Treasury Secretary Janet Yellen from seeking enforcement of the rule against the states last November.

U.S. District Judge L. Scott Coogler sided with the states, calling the mandate “a federal invasion of state sovereignty” and ruling that it was an “unconstitutionally ambiguous spending condition.”

The judge found that the rule violated the spending clause of the U.S. Constitution. The provision made it impossible for states to make informed choices about the costs of receiving relief funds because they could not know how to exercise taxing authority without putting the funds at risk, Coogler decided.

West Virginia Solicitor General Lindsay See, who represents the states, told the 11th Circuit panel on Tuesday that the rule is unclear about what it means to “directly or indirectly” offset tax cuts with relief funds.

The ambiguity leaves states on uncertain ground, without an understanding of how they can avoid being asked to repay the money due to an indirect offset of net tax revenue, See argued.

U.S. Circuit Judge Robert Luck, a Trump appointee, questioned the attorneys about whether the mandate was specific enough to allow states to understand the agreement they were getting into.

Winik argued that a regulation put forward by the Treasury Department in January should have cleared up any confusion. He added that Congress is not obligated to spell out the details of how a condition should be applied.

But Luck appeared unconvinced. “There has to be some ascertainable basis to see what that net reduction is,” the judge said. “How could states possibly know?”

Luck also said regulations might not be enough to “fit the bill” due to their ephemerality, noting that policies can change depending on who is in office.

Winik put forward that states could naturally measure a reduction by comparing pre-pandemic budget numbers.

But See told the panel that the regulation to clarify the restriction is “not legally relevant.”

“Under the spending clause, Congress must speak clearly,” See said. “The rule of law has to be clear from the law itself… We’re not arguing that regulations can’t clear up some details. But it’s not clear from the statute what the baseline is going to be.”

Even with the regulation, See said the states “still don’t know what it means to cut taxes with ARPA funds.”

Luck was joined on the panel by fellow Trump appointee U.S. Circuit Judge Andrew Brasher and Senior U.S. Circuit Judge Ed Carnes, a George H.W. Bush appointee.

The panel did not indicate when it will make a decision in the case.

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